Hello, Friend got a new truck. Price of truck OTD = $45k Down payment at time of finance = $2k ($43k financed) Interest = 6.9% Total for 75 months = $55.5k roughly which means it’s about $10k of ONLY interest. Payment = $710/month
Correct me if I’m wrong but in theory this truck can be paid off tomorrow and my friend pays none of the $10k interest, right? Anyway, my friend has a check that he wants to use of about $23k. My question is: is it better to put the $23k towards the auto loan right now (ensuring that the money goes towards the principal) or is there a better alternative like placing the money in a HYSA and earn about a 5% interest (I know it can fluctuate) and use that account to pay off the debt gradually? He’d be paying a lot more than the minimum monthly as well. I guess the only upside to this is though is having more cash liquid if ever needed.
You must log in or register to comment.
if he has any CC debt, pay that off first, its almost certainly at a higher interest rate than the car loan. then if his car loan is the highest remaining interest rate of all his debts dump the remainder of his cash into that.
If it was me, I would pay off the car loan.
No.
The simple answer is probably no. If your “friend” can’t pay off the loans principal+accrued interest then just paying on the loan is best. A HYSA won’t yield enough interest to save any money. In fact your “friend” would pay more in interest this way.
One good option would be to take a large chunk(maybe 10-15k) and make a payment towards principal. You keep a rainy day fund and reduce the interest owed. Save more and request a payoff once enough money is available to clear the loan. While the benefits of payment history boosts the credit score.
Another good option, if money is no problem, dump the full 23k into principal. From there pay as much as possible on each payment to clear the loan ahead of time. If the loan doesn’t have a prepayment penalty refinancing doesn’t matter. If you payoff the loan early the lender returns any unearned interest. Refinancing costs money and with current rates still rising would probably be no help.
I know both sound the same but one is keeping savings and the other is dependent on having enough money coming in that a rainy day fund doesn’t matter.
Pay it off as fast as you can.
I see a lot of people concerned there is a pre-pay penalty (which I know exists, but personally never seen on an actual loan). That would be shady to me and again I know shadiness in the world grows every day.
Y 6l
If you decide to make the payment, make sure it’s applied toward the principle not the interest first. I made the mistake of just making extra or higher payments on a vehicle loan and the bank applied it toward the anticipated interest first. There was no prepayment penalty so I thought I was in the clear to just do so. Yes it shortened the life of the loan and how much interest I total would be paid, but banks will always look after there own …ahem… interests.
Does it even matter if the money goes towards anticipated interest? If the loan is still going you’re going to pay that interest anyway no?
I’d overpay my monthly payments. That way you’re still cutting deep into the interest and you have the money for whatever might come up.
Like pay 1400/month for 24 months.
That’s what we did with my wife’s Defender. Bought it in September 2020 on a 5 year loan, paid it off in November 2020 because I didn’t feel like paying interest
Gonna disagree with some of the other comments here: If his plan is to throw it into a HYSA (~5%), he’s better off using that lump sum toward the car (assuming no penalty). 6.9% APY on $43,000 = ~$3000 a year, 5% APY on $23,000 = $1,150 a year.
If he wants to invest it to get ahead, he’d have to beat the 6.9% APY. That’s the purely “numbers” answer though. If $23k sitting in a HYSA gives him a sense of security, I’m all for it.
The only thing here is that the $25k in the hysa won’t depreciate. Just an added to consider. But I guess if he keeps the truck for the longer term in should matter. Right?